Michigan Court of Appeals; Docket #358188; Unpublished
Judges Cavanagh, O’Brien, and Rick; Per Curiam
Official Michigan Reporter Citation: Not Applicable; Link to Opinion
Innocent Third Party Doctrine
In this unanimous, unpublished, per curiam decision, the Court of Appeals reversed the trial court’s summary disposition order dismissing Defendant Pioneer State Mutual Insurance Company’s (“Pioneer”) motion for summary disposition, in which it sought dismissal of Plaintiff Farm Bureau Insurance Company’s (“Farm Bureau”) reimbursement action against it. The Court of Appeals held that the equities weighed in favor of rescinding the subject Pioneer insurance policy, even as to the claim of an innocent third party thereunder.
Ronald Seppala was injured in a car accident while traveling as a passenger in a vehicle driven by his ex-wife, Rhonda Meadows. After the accident, Seppala sought No-Fault PIP benefits from the Michigan Automobile Insurance Placement Facility (“MAIPF”), which assigned his claim to Farm Bureau. After paying his benefits initially, Farm Bureau discovered that the vehicle Meadows was traveling in at the time of the accident (2017) was insured by Pioneer, and that Pioneer, therefore, was the highest priority insurer under the No-Fault Act’s former priority scheme. Farm Bureau proceeded to file an action for reimbursement against Pioneer, and Pioneer, with its response, filed a cross-claim against Meadows, seeking rescission of her policy because she failed to disclose that she was living with Seppala in her original application for coverage. Meadows never answered Pioneer’s cross-claim, and a default judgment was eventually entered against her. Pioneer then moved for summary disposition against Farm Bureau based on the default judgment, but the trial court denied its motion, holding that the equities weighed against rescission of Meadows’ policy as to Seppala, an innocent third party.
The Court of Appeals reversed the trial court’s summary disposition order, holding that the equities weighed in favor of rescinding Meadows’s policy as to Seppala. At the outset of its analysis, the Court set forth the factors to be considered when determining whether a policy can be rescinded with respect to an innocent third party:
“(1) the extent to which the insurer could have uncovered the subject matter of the fraud before the innocent third party was injured; (2) the relationship between the fraudulent insured and the innocent third party to determine if the third party had some knowledge of the fraud; (3) the nature of the innocent third party’s conduct, whether reckless or negligent, in the injury-causing event; (4) the availability of an alternate avenue for recovery if the insurance policy is not enforced; and (5) a determination of whether policy enforcement only serves to relieve the fraudulent insured of what would otherwise be the fraudulent insured’s personal liability to the innocent third party.”
The Court determined that the first factor was neutral because neither Pioneer nor Farm Bureau presented any facts to establish whether Pioneer could have discovered Meadows’s fraud before the accident. The Court determined that the second factor weighed against rescission as to Seppala, because the evidence affirmatively showed that Seppala did not know that the vehicle was insured, and if he did not know that the vehicle was insured, he could not have known that Meadows committed fraud in procuring insurance. The Court determined that the third factor weighed against rescission as to Seppala, because there was no evidence that Seppala was responsible for the accident. The Court determined that the fourth factor—the purpose of which is to “consider the ‘present situation’”—weighed “heavily” in favor of rescission as to Seppala, because “the ‘present situation’ in this case is that Seppala has not only a theoretical alternate source of recovery, but he has already recovered benefits from that alternate source, and that alternate source will continue as his insurer for any remaining liability.” Lastly, the Court determined, without addressing, that the fifth factor was neutral.
The Court then acknowledged that two factors weighed against rescission as to Seppala, two factors were neutral, and one factor weighed in favor of rescission as to Seppala. However, the Court noted, “the ‘factors are not to be merely counted up,’ but are instead to be weighted in an effort to determine the ultimate issue of ‘which innocent party should bear the’ burden of the insured’s fraud.” In this case, even though more factors weighed against rescission as to Seppala than for it, the Court determined that the fourth factor outweighed both the second and third.
“Thus, to summarize, when viewing the five factors in the light most favorable to the nonmoving parties, two factors are neutral, two weigh against rescission, and one weighs heavily in favor of rescission. While it is true that more factors weigh against rescission than in favor of rescission, the ‘factors are not to be merely counted up,’ but are instead to be weighed in an effort to determine the ultimate issue of ‘which innocent party should bear the’ burden of the insured’s fraud. Farm Bureau II, 337 Mich App at 108. See also Farm Bureau I, 503 Mich at 903 (MARKMAN, J., concurring) (explaining that ‘[t]he ultimate issue in innocent-third-party cases’ is which innocent party ‘should bear the ultimate burden of the insured’s fraud’). As explained when discussing factor four, the “present situation” in this case, Pioneer, 331 Mich App at 413, is that Seppala has already recovered benefits from an alternate source, and that source will continue as Seppala’s insurer for any remaining liability. It follows that, practically speaking, if the at-issue policy is rescinded, neither Pioneer nor Seppala would bear the burden of Meadows’ fraud. On the other hand, if the contract is not rescinded, Pioneer would bear the burden for Meadows’ fraud. Under this practical reality, the only reasonable outcome is rescission of the policy. Accord Farm Bureau I, 503 Mich at 903 (MARKMAN, J., concurring) (‘Where the innocent third party possesses an alternative means of recovery, equity may weigh in favor of rescission because the insurer need not suffer loss because of the fraud.’).”